IRB has maintained its concerns on the BOT segment, citing low toll rates and traffic on some roads. Photo: Pradeep Gaur/Mint
IRB Infrastructure Developers Ltd’s September quarter performance was a mixed bag. Indeed, the construction firm met analysts’ expectations, with a 30% surge in net revenue over a year back.
This growth was on the back of quick execution of projects under construction, one part of its business, where revenue growth of 50% was a tad above the Street’s estimates.
But its build-operate-transfer (BOT) road assets played a spoilsport. Income in this segment was below forecast, although it grew by 10%. A few reasons were responsible. One, toll rates during the quarter were low or revised downwards in some cases, due to a low Wholesale Price Index to which tariffs are linked. Secondly, traffic growth was minimal during the quarter due to weak economic growth. Lastly, and more challenging was the wavering stance of the government, which directed developers to stop collecting tariffs on some routes or exempt passenger cars and state transport buses from paying toll. Obviously, the firm’s business parameters would go haywire with such sudden regulatory changes.
Following the dip in revenues, operating margin of the BOT segment at 85% fell short of the consensus estimate, which was 87%. This was about 390 basis points lower than a year ago. This dragged IRB Infrastructure’s overall operating margin to 52.6%—a steep drop of 650 basis points and lower than what was expected. One basis point is 0.01%.
What’s more, the management maintained its concerns on the BOT segment, citing low toll rates and traffic on some roads, while alternative toll-free routes were affecting some roads. It was not surprising, therefore, that IRB Infrastructure’s shares dropped by 4.3% on Friday, on an otherwise strong trading day, and fell further by 1.63% on Monday.
That said, the company’s order book has hit a sweet spot, with a Rs.11,400 crore backlog as of September 2015, which is 5.2 times its fiscal 2015 construction revenue. Another positive is its relatively better standing in terms of cash flows and leverage, giving it an edge when bidding for projects.
But investor concerns about the BOT projects’ segment will weigh on the stock, given that its profitability is higher than that of the construction segment.
The writer does not own shares in the above-mentioned companies